Brazil's debt plan tests warming ties to banks. Strapped again

ByTyler Bridges, Special to The Christian Science MonitorMarch 31, 1988

Sao Paulo, Brazil
— Four months after ending a moratorium on debt payments to private foreign banks, Brazil is warning creditors that it cannot make its next round of interest payments unless the country receives more than $1 billion in new loans. The interest payments are supposed to start next month. At the Inter-American Development Bank's annual meeting last week in Venezuela, Finance Minister Mailson da Nobrega told Brazil's bank advisory committee that the country cannot pay the $1.5 billion owed in interest from April to June without fresh funds. He suggested that if private banks are unwilling to give the loans, the money might come from the United States Treasury or the World Bank.

Mr. Nobrega's warnings do not represent a return to the hard-line policy followed by former Finance Minister Dilson Funaro, who declared the debt moratorium in February 1987, bankers say. With less than $4 billion in foreign reserves, Brazil doesn't have enough cash to cover the amount due, they emphasize.

``Brazil simply can't pay if it doesn't have the money,'' says Igor Cornelsen, senior representative of the London-based Libra Bank. ``Banks should be pragmatic and flexible.''

Brazil resumed interest payments in December, with a majority of the money coming from $3 billion banks agreed to lend the country.

In early March, Brazil and the bank advisory committee reached a preliminary agreement to reschedule over the next 20 years the $70 billion Brazil owes the banks.

The agreement would reduce the interest rate for debt payments, saving the country hundreds of millions of dollars annually, and give Brazil more than $2 billion in new loans.

The new money could be used to meet April-June interest payments, but bankers say it could be weeks before Brazil's creditor banks approve the agreement.

Even then, agreement isn't assured, since banks are demanding International Monetary Fund approval of Brazil's economic policies before accepting the debt agreement.

Many banks - particularly smaller, regional ones - are wary about lending additional money to a country that appears unable to pay back the money it already owes, especially with the economy suffering from an acute case of stagflation.

Brazil's foreign debt is $113 billion, the highest in the developing world.

Inflation is running at an annual rate of 600 percent, economic growth is flat in per capita income terms, investment has fallen to historically low levels, and the federal budget deficit has balloooned to 7 percent of gross national product, about twice the United States' level in percentage terms.

``It will be difficult to convince all the boards of directors of banks to give Brazil a break by lending more money,'' says a senior US diplomat in Brazil. ``The IMF is absolutely needed as a guarantor.''

Bankers say they expect that obtaining the IMF's approval will prove difficult, because Brazil's government has shown itself either unwilling or unable to win the political support needed to slash the huge budget deficit, which economists blame for the soaring inflation rate.

But bankers say they have been more hopeful since March 22, when the country's Congress, in drafting Brazil's new constitution, voted overwhelmingly to continue with the presidential system of government, rather than adopt a parliamentary one, and to give the president five years in office instead of four.

Both decisions greatly strengthened embattled President Jos'e Sarney and apparently ensure that he will remain in office until 1990.

``Sarney's been mediocre up to now, but the congressional votes give him the chance to take the radical steps needed to put the house in order,'' says Roberto Macedo, dean of Sao Paulo University's school of economics.

Mr. Sarney is studying proposals submitted by Nobrega that would sharply reduce government spending to reduce the deficit.

The President's political advisers are reportedly telling Sarney that Nobrega's plan would throw the economy into recession and make the government even more unpopular.

Foreign bankers have sided with Nobrega, saying the measures will have to greatly reduce the deficit to win IMF backing and lead to adoption of the foreign debt agreement.